How to create a budget for a business
Start with end in mind for your business budget - Net Profit
To start creating a budget for a business, start with determining how much net profit you want to shoot for, i.e how much net proft each month and for the full year are you aiming for? This should ideally be a slight stretch too, you want something to push for, something that is a goal for you, that way the business budget is not an “easy” outcome, but something that you work hard to achieve, it motivates you to work harder and be more profitable. Essentially this is a “reverse engineering” process, i.e we work backwards from where you want net profit to be for each month and for the full financial year. By knowing exactly how much net profit you want each month and for the year it will make all the other steps to create a budget for a business much easier.
Calculate and determine your known expenses for your business
For this step you want to go through all your expenses and work out the expenses that you can determine reliably, these might be repeating monthly expenses, for example rent, telephone expenses, internet, subscriptions, wages, etc and include them in your budget for your business. This will enable you to flesh out your budget with quite a few expense items that are accurate in terms of knowing exactly how much they will be for the month and for the year. This is a good place to start with your business budget and will help you get the ball rolling quickly with thinking about what you need to include in the budget for your business.
Approximate any other expenses to include in your budget
For any other business expenses where you’re not sure exactly how much they will be for the month/year, you can go through and approximate them. Typically here you’ll go through the prior year figures and use them as a guide to determine approximately how much these expenses will be for the month/year. For your COGS (cost of goods sold) expenses (if relevant for your business), i.e purchases, you can often just use your GP (Gross Profit) ratio as a guide to determine how much this will be. For COGS you typically will calculate these after you calculate and determine your revenue for the month/year. At this point of the process your budget for your business should be largely complete, especially on the expenses side.
Estimate your business revenue
Using last years figures as a guide and considering seasonality, go through each month of this year and estimate how much business revenue you expect to make. If you have COGS, as discussed in point 3 above, you can begin to calculate them based off of your revenue estimates. At this point you will have a net profit figure in your budget for each month and for the year. Going back to point 1 where you set a goal for your net profit, you can begin to compare your current budgeted net profit to the goal net profit you determined earlier at point 1. If you need to adjust your revenue estimates to arrive at your goal net profit, you should consider doing that here. Ideally you want to adjust things so that you arrive at your goal net profit for each month and for the year. It should ideally still be somewhat realistic and achievable, however a slight stretch is also a good thing, it will motivate you to achieve more. After these steps and after making any adjustments, you should now have your completed budget for your business.
Having a business budget in place every month and year is a really important thing to do for any business. You need something to aim for, something to track your progress and your actuals against. Otherwise you are essentially flying blind, you don’t know what you are aiming for and you don’t know if you had a good month or a bad month. Further, decision making is much easier when you have a budget process in place as it allows you to see the impact of certain business decisions. The above steps we outlined should be a great help and something you can refer back to on how to create a budget for a business.
We help many businesses create their budget each year, If you need any assistance with creating a business budget, especially with the new financial year just around the corner, please get in touch with us. We would love to have a chat with you to discuss how we can help to create a budget for a business that you can use to help achieve your goals, and how we can run regular reports for you to review and track against your actuals every month. Book a free consultation here to discuss how to create a budget for a business.